Farmers who ended up supplying Fonterra Cooperative Group when it bought a failed Canterbury dairy business out of receivership shouldn't be entitled to the benefits provides to its shareholder farmers, the Court of Appeal heard today.

Fonterra is appealing a decision in the High Court in Auckland last December, where Justice Matthew Muir ruled the milk processor breached the Dairy Industry Restructuring Act (DIRA) under which it operates by imposing inferior terms on farmers who had previously supplied New Zealand Dairies Limited (NZDL).

Fonterra acquired the independent processor's plant in 2012 and took on the farmers, who supplied milk from farms in North Otago and South Canterbury. Fonterra made a deal with the farmers, agreeing to buy their milk under a "growth contract", rather than a fully share-backed supply, where farmers purchase one Fonterra share for every kilogram of milk solids they supply in a season and are paid the farmgate milk price plus a dividend on each share.

Under the growth contract, the farmers were entitled to 5 cents less per kilogram of milk solids than the contract milk price and bought 1,000 Fonterra shares but couldn't "share up" - become fully share-backed - in their first year of supplying Fonterra. According to DIRA, the legislation enabling the merger of the Dairy Board with the New Zealand Dairy Group and Kiwi Cooperative Dairies, Fonterra is not able to give new entrants different terms from its existing shareholding farmers. Justice Muir found that the farmers qualified to become fully-fledged shareholders and Fonterra misled them about their ability to buy more shares.


In the appeal court today, Fonterra's lawyer described the 1,000 shares owned by each farmer as a "token" and said they didn't qualify as 'shareholder farmers' under the terms of DIRA, provoking questions from Justice Helen Winkelmann and Justice Tony Randerson.

The lawyer said the farmers were trying to avoid being bound by the terms of the contract they signed where they were paid some $20 million that had been lost when NZDL went into receivership.

"The essence of the deal was that the respondent farmers had been left $21 million out of pocket by the collapse of NZDL, and their main asset was their milk supply," he said. "They are looking to have their $21 million plus all the benefits they would have had if they had come in as fully share-backed suppliers."

The respondents are not shareholder farmers "because they're supplying on contract," the lawyer said.

"The contract says, in this case, you don't have to share up, and you can't share up in the first year. You're not supplying as a shareholder farmer, you're supplying under contract."

Justice Winkelmann said that "to say that they aren't [a shareholding farmer] at all seems difficult to follow," and that "these definitions seem a little circular."

"The growth contract is an alternative to Section 73 [of DIRA]," Fonterra's lawyer said. "Section 73 gives you the right to come in, but you have to pay the capital and a growth contract gives you an alternative."

The case was split by consent in the High Court, with questions about reliance and loss delayed for later adjudication, so the lower court did not award costs. Justice Randerson said the split seemed odd, with the appeal court asked to refer to misrepresentations while the issue of reliance is left for another day. Fonterra's lawyer said it had been done as otherwise the original trial would have been very long.

The hearing is set down for two days and is continuing.